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In 2003, the Florida Legislature, with the stated goals of reducing the amount of construction-defect litigation and protecting the rights of property owners, created a mandatory pre-litigation alternative dispute resolution proceeding by enacting Chapter 558 of the Florida statutes.

Pursuant to Chapter 558, before a property owner can file a lawsuit for construction defects, the owner must first provide written notice of the defects to the responsible parties (contractor, subcontractor, supplier or design professional as applicable) and give them an opportunity to investigate and to resolve the claims. This notice and cure process has had mixed results in its real-world application, and as a result the Legislature has continued to tweak Chapter 558 through various amendments since it was first enacted.

Now, Chapter 558’s ability to achieve the aforementioned goals faces its stiffest challenge yet, as the U.S. Court of Appeals for the Eleventh Circuit has recently certified to the Florida Supreme Court the question of whether a contractor’s insurance company is obligated to provide coverage to the contractor for its fees and costs incurred in responding to and addressing a property owner’s Chapter 558 notice. The issue in Altman Contractors v. Crum & Forster Specialty Insurance arose because the insurer denied coverage, arguing that a Chapter 558 notice does not satisfy its commercial general-liability policies’ definition of “suit,” and that under the terms of those policies, it only has to defend the insured against a “suit” seeking damages to which the insurance applies.

The U.S. District Court for the Southern District of Florida ruled in favor of the insurer, finding that a Chapter 558 notice was not a suit and therefore Crum & Forster did not have to provide a defense or indemnity. The insured, Altman Contractors, filed an appeal to the Eleventh Circuit. Earlier this month, after receiving briefs from the parties and the construction and insurance industries, the Eleventh Circuit decided that since it was an issue of first impression and because of the important public policy considerations involved, it should be resolved by the Florida Supreme Court.

From the property owner’s perspective, the Chapter 558 pre-litigation proceeding is beneficial only if the property owner can obtain a resolution faster and at less cost than it could achieve by proceeding straight to litigation. Similarly, the primary benefit for those in the construction industry is the ability to avoid the costs and time incurred by being involved in litigation. Although the property owner is likely not concerned with whether it is the responsible parties or those parties’ insurers that pay to remedy the defects and damages, it should be concerned with whether the responsible parties are incentivized to meaningfully participate in the Chapter 558 alternative dispute resolution proceeding.

And if those in the construction industry forgo their right to insurance coverage by resolving the claims prior to being sued, that is certainly a significant disincentive for them to pursue a pre-litigation resolution. Thus, property owners and the construction industry are generally aligned in wanting insurance coverage for the Chapter 558 pre-litigation proceedings. Accordingly, the construction industry argues that as a matter of public policy, in order to achieve Chapter 558’s stated goals insurance policies must be construed as providing coverage.

Insurance Crisis?

The insurance industry argues that the express language of Chapter 558 and their standard policies do not require that they provide insurance coverage. Moreover, they contend such a requirement is not necessary because insurers have the contractual right to voluntarily participate in the proceedings and to settle the claims without a suit being filed. They further note that insurers have an incentive to participate because they may achieve an economic benefit by settling prior to litigation being filed. Additionally, Crum & Forster has argued that if it were required to provide such coverage, it would create an insurance crisis, limiting the availability of the insurance and dramatically increasing premiums.

The Florida Legislature, in apparent recognition that achieving a pre-litigation resolution is implausible if insurers do not participate, amended Section 558.01 effective Oct. 15, 2015, to note that the proceedings provide the “contractor … and the insurer of the contractor … with an opportunity to resolve the claim.”

The Legislature, however, did not amend Chapter 558 to expressly require insurance coverage. Despite the insurance industries’ claims to the contrary, without a requirement that insurers provide coverage, contractors and others in the construction industry will not meaningfully participate in Chapter 558, and Chapter 558 will simply become a futile process that property owners have to endure before filing suit.

Homeowner and commercial property insurance policies typically exclude loss or damage caused by or resulting from neglect.1 Under the ISO Homeowners 3-Special Form,2 neglect means “neglect of an ‘insured’ to use all reasonable means to save and preserve property at and after the time of a loss.” Under the ISO Commercial Property Causes of Loss-Special Form,3neglect means “neglect of an insured to use all reasonable means to save and preserve property from further damage at and after the time of loss.” As both forms clearly and unambiguously state, the exclusion does not apply to pre-loss neglect. Rather, it applies only to neglect of an insured at and after the time of loss.4

But, what if the purported neglect occurred after an incident which also resulted in a loss? That was the issue raised in Chicago Import, Inc. v. American States Insurance Company. There, a sprinkler at the insured’s warehouse sprayed water, damaging inventory. The Chicago Fire Department was called, who turned off the water supply and replaced the sprinkler. After the sprinkler was replaced, the Chicago Fire Department employees told a Chicago Import employee that “everything was okay” with the sprinkler system. Chicago Import submitted an insurance claim, which American States paid.

Three weeks later, a fire broke out in the warehouse. But, the sprinkler system was off at the time of the fire. American States denied coverage for the fire, asserting that the “neglect” exclusion barred coverage because the damage was caused by Chicago Import’s failure to turn the sprinkler system on after the repairs. Chicago Import denied that it knew the system was off, stating it left such matters to the Chicago Fire Department.5

Both parties moved for summary judgment on applying the neglect exclusion. American States relied on Bass v. Illinois Fair Plan Ass’n,6 in which coverage was not afforded for a third fire because the insured failed to adequately protect the building after two prior fires by not boarding it up. The federal district court in Chicago Import distinguished Bass, stating that the losses there resulted from the same harm (fire), while the losses before it resulted from entirely different harms (water and fire). The district court reasoned that “[i]f a wayward sprinkler head requires an insured to take all reasonable measures to protect against a later fire, the distinction between pre and post-loss neglect is meaningless – once an insured makes a single claim the distinction is forever lost, regardless of the timing of, or dissimilarity between, the losses.”7 Because American State’s complaints were about pre-loss neglect, the district court found that the neglect exclusion did not bar coverage, and granted summary judgment for Chicago Import.

Even if the exclusion applied, the district court in Chicago Import noted that it would have denied both parties’ motions because there were genuine issues of material fact as to (1) whether any employee knew or reasonably should have known that the sprinkler system was off and (2) whether the extent of damage would have been less had the system been on, given the “save and preserve property from further damage” language in the exclusion. On the issue of knowledge, the district court appears to have followed the Tuchman court’s interpretation that “the insured must have knowledge of a readily identifiable, imminent, and real peril, endangering the property.”8

1 The neglect exclusion appears in the 165-line, 1943 New York Standard Fire Policy adopted by many jurisdictions, including Illinois, at lines 21-24: “neglect of the insured to use all reasonable means to save and preserve the property at and after a loss, or when the property is endangered by fire in neighboring premises.”2 HO 00 03 05 01.3 CP 10 30 04 02.4See Tuchman v. Aetna Cas. & Sur. Co., 55 Cal.App.4th 1607, 52 Cal.Rptr.2d 274 (1996). See also5 John Alan Appleman & Jean Appleman, Insurance Law and Practice § 3115.5 The neglect exclusion in the American States policy was worded the same as the ISO Causes of Loss-Special Form’s neglect exclusion.6 98 Ill.App.3d 549, 424 N.E.2d 908 (1981).7Chicago Import, Inc. v. Am. States Ins. Co., 2015 WL 2193138, at *2 (N.D.Ill. Aug. 16, 2016).8Tuchman, 55 Cal.App.4th at 1616, 52 Cal.Rptr.2d at 279.

New Jersey has joined a growing number of jurisdictions in ruling that damages from a subcontractor’s faulty workmanship may trigger coverage under a Developer/General Contractor’s Commercial General Liability (“CGL”) policy. On August 4, 2016, the New Jersey Supreme Court rendered a unanimous decision affirming the Appellate Division’s holding that consequential damages stemming from a subcontractor’s faulty work constitute “property damage” caused by an “occurrence” as defined by the policy.1

In Cypress Point Condominium Assoc. Inc. v. Adria Towers, the condominium association for a luxury condominium complex sued the developer and several of its subcontractors. Plaintiffs alleged that the subcontractors’ faulty workmanship caused consequential damages, specifically water infiltration to interior structures, common areas and unit owners’ property. After Plaintiffs filed suit, the developer tendered notice to its insurer, seeking defense and indemnity against these claims. The developer’s insurer denied coverage. The Plaintiffs subsequently “filed an amended complaint, seeking a determination whether its claims against the developer were covered by the [insurer’s] CGL policies.”2 The insurer’s amended answer denied any such obligation.

Thereafter, the insurers moved for summary judgment on the basis that the subcontractor’s faulty workmanship did not constitute an “occurrence” that caused “property damage” which would trigger coverage. The trial court agreed and granted summary judgment in the insurer’s favor, ruling there was no “occurrence” of “property damage” as required under the terms of the policy.

On appeal, the Appellate Division reversed,3 holding that “under the plain language of the CGL policies, the unintended and unexpected consequential damage caused by the subcontractors’ defective work constituted “property damage” and an “occurrence.” The New Jersey Supreme Court granted the insurers’ petition for certification.

The New Jersey Supreme Court unanimously affirmed the Appellate Division. In its analysis, the court determined that the consequential water damages from the subcontractors’ faulty workmanship are covered by the developer’s CGL policies. Among other findings, the court agreed with the appellate court’s analysis distinguishing two seminal New Jersey cases relied upon by the trial court in its finding for the insurers, Weedo v. Stone-E-Brick, Inc.,4 and Firemen’s Insurance Company of Newark v. National Union Fire Insurance Company,5 These two cases have been heavily cited by many jurisdictions and relied upon by insurers for decades because they support the assertion that CGL policies do not cover consequential damages caused by a subcontractor’s faulty workmanship.

Significantly, the Cypress Point court found those cases inapplicable because they construed an earlier 1973 version of the standard CGL form that included a “your work” exclusion. The 1973 form favored insurers by specifically excluding coverage for property damage to the insured’s completed work—i.e., the developer’s entire project. In 1986 the form was revised to include a “subcontractor” exception to the “your work” exclusion. The exception expressly states that the exclusion eliminating coverage “does not apply if the damaged work was performed on the developer’s behalf by subcontractors”. This exception grants developers with coverage for damages arising from subcontractors’ faulty work.

What does Cypress Point mean for policyholders? Positive developments; it marks a victory for real estate developers and general contractors whose claims for defective work performed by subcontractors were previously barred by stringent exclusions. The New Jersey Supreme Court has clearly ruled in favor of the policyholder by holding that the plain language of the CGL policy covers claims for damages caused by a subcontractor’s shoddy work.

In sum, policyholders should be aware of the subcontractor exception to the often-cited “your work” exclusion. If your insurer has denied or limited coverage for such damages based on this exclusion, review your CGL policy to determine if the denial is enforceable or whether it was erroneously invoked based upon an outdated exclusion. Finally, if you’re not sure about something in your insurance policy, seek the guidance of coverage counsel.

Experienced insurance-coverage attorneys and brokers know that in many cases the biggest expense to the insured is not the repayment of whatever damages are alleged by the plaintiff, but rather the insured’s own defense costs. Therefore, one of the main objectives of coverage litigation is often to ensure that the insurer honors its duty to pay for the defense of its insured. Parties frequently file motions for summary judgment on the issue of whether the insurer owes a duty to defend, and the outcome of those motions can be significant to settlement negotiations. What if neither party’s motion for summary judgment is granted, though? A recent decision from Ohio’s Ninth District Court of Appeals may allow the parties another bite at the apple by virtue of an immediate appeal.

The facts of Lexington Ins. Co. v. DunnWell, LLC, 9th Dist. Summit No. 27476, 2016-Ohio-5311, can be distilled down to the following summary. DunnWell and its insurer, Travelers, argued that West Bend Mutual Insurance owed DunnWell a duty to defend and indemnify for an underlying claim because DunnWell was an additional insured on a West Bend CGL policy issued to DunnWell’s subcontractor, ABCO. Naturally, West Bend and ABCO disagreed. (You don’t read many blog posts about parties harmoniously agreeing, do you?) The parties filed cross-motions for summary judgment seeking a declaratory judgment on that issue, but the trial court denied both motions because of genuine issues of material fact. ABCO appealed, and DunnWell and Travelers filed a cross-appeal.

Before addressing the merits of the appeal, the Ninth District raised the question of whether it had jurisdiction to hear the appeal at all. Under Ohio law, parties can only appeal from a “final, appealable order.” In Gen. Acc. Ins. Co. v. Ins. Co. of N.Am., 44 Ohio St.3d 17, 540 N.E.2d 266 (1989), the Ohio Supreme Court provided a two-step process for determining whether an order is final and appealable. First, the order must be final within the requirements of R.C. 2505.02. One of the varied types of final orders under R.C. 2505.02 is an order affecting a “substantial right made in a special proceeding.” The General Accident Insurance Court held that the duty to defend is a “substantial right” and that declaratory-judgment actions are “special proceedings” for purposes of R.C. 2505.02. The second step of the analysis is determining whether Civil Rule 54(B) language is required. Rule 54(B) provides that, in cases involving multiple claims or parties, an order that enters final judgment as to fewer than all of the claims or parties is a final appealable order only if the trial court expressly determines that “there is no just reason for delay” of an appeal of the order.

Questions of whether an order is final and appealable are often complex; however, one of the widely understood rules in this area is that an order denying summary judgment is generally not a final appealable order. Despite that general rule, in DunnWell the Ninth District reasoned that the trial court’s order denying the cross-motions for summary judgment was a final appealable order. The Ninth District reasoned that “[w]here the denial of a motion for summary judgment in the context of declaratory judgment gives rise … to the reasonable and logical inference that one party has in fact prevailed, the requirements of finality are satisfied.” DunnWell at ¶ 10. As support for its reasoning, the Ninth District cited Indiana Ins. Co. v. Alloyd Insulation Co., 2d Dist. Montgomery No. 18979, 2002-Ohio-3916, where the court held that an order denying the insurer’s motion for summary judgment was a final appealable order because the trial court “suggested that its negative ruling supported a positive inference that [the insurer] had a duty of coverage.” Id. at ¶ 4.

Turning to the facts before it, the Ninth District reasoned that the denial of the cross-motions for summary judgment gave rise to a “reasonable, positive inference that West Bend need not defend DunnWell” for the underlying claim. DunnWell at ¶ 11 (emphasis added). Furthermore, the court noted that denial of the cross-motions left DunnWell with the unattractive choice of either settling the underlying claim in order to avoid paying its own defense costs, or paying for its defense on its own and hoping to eventually prevail on the duty to defend at trial. Crucially, the Ninth District recognized that “[e]ither scenario impacts the substantial rights recognized by the Ohio Supreme Court” regarding the duty to defend. Id. The Ninth District further reinforced its reasoning by noting that the trial court certified its judgment as a final appealable order pursuant to Rule 54(B).

Unlike the Second District in Alloyd Insulation, the Ninth District did not highlight any particular phrasing or argument in the trial court’s order which led to the “reasonable, positive inference” that the order was a de facto victory for West Bend and ABCO. Rather, the simple fact that the order left DunnWell with “no legal recourse to compel West Bend to provide a defense” was sufficient. Id. Therefore, perhaps the crucial takeaway from DunnWell is that it arguably supports the proposition that, in a declaratory-judgment action, an order which does anything other than affirmatively grant the insured summary judgment on the duty to defend is a final appealable order. Think of the possible permutations: under General Accident Insurance, an order affirmatively granting summary judgment to the insurer is already a final order. Under Alloyd Insulation, an order denying summary judgment to the moving party but not granting it to the non-moving party is a final order because it arguably creates an inference of eventual judgment in the non-moving party’s favor. Now, under DunnWell, an order denying summary judgment toboth the insurer and the insured on cross-motions for summary judgment is a final order because it creates an inference in the insurer’s favor. No matter how you slice it, therefore, any summary-judgment order which does anything other than affirmatively conclude that the insurer owes a duty to defend creates at least an inference that there is not a duty to defend, and is therefore a final order subject to immediate appeal (provided the court complies with Rule 54(B), if necessary). If that interpretation of DunnWell gains widespread acceptance, the implication on insurance-coverage litigation in Ohio could be significant: insureds may be more willing to aggressively litigate the duty to defend, knowing that even if they lose in the trial court on summary judgment they will have the opportunity to immediately appeal. In turn, the potential for increased litigation expenses could alter the settlement analysis for both insurers and insureds.

In a perfect world, courts would always grant insureds’ motions for summary judgment on the duty to defend. In the imperfect world we live in, however, insureds and their counsel would be well-served to keep DunnWell in their back pocket as a helpful precedent to support an immediate appeal of an order denying summary judgment on the duty to defend.

Plaintiff Dana Johno sued the Plaquemines Parish Government, its contractor Leon Duplessis & Sons, Inc. and its subcontractors HardRock Construction and Pro Tree Services, for demolishing his rental home, damaged during Hurricane Katrina, without his consent. Johno settled with Duplessis and the Plaquemines Parish Government. At the same time, Scottsdale Insurance, who allegedly insured Duplessis, refused to participate in the settlement. As part of the settlement with Duplessis, the settlement agreement executed by the parties included an assignment to Johno of Duplessis’ “contractual rights” against HardRock and Scottsdale. (Although not clear from the court’s opinion, it appears that HardRock’s was the Named Insured on Scottsdale’s Policy and there may have been an additional insured endorsement in favor of Duplessis as the contractor of HardRock). Johno then amended his petition to add claims against Scottsdale, including a claim that Scottsdale had committed bad faith in failing to settle with Johno on behalf of Duplessis. Scottsdale challenged whether Johno had a cause of action against it for bad faith failure to settle.

The Fourth Circuit Court of Appeal first noted that a claim for bad faith failure to settle arises under Louisiana Revised Statute 22:1973. Section A of that statute establishes that an insurer owes its insured a duty of good faith and fair dealing, the breach of which makes the insurer liable for damages sustained as a result of the breach. Section B of the statute provides a list of six acts, which, if committed knowingly by the insurer, subject it to penalties equal to the greater of two times the damages sustained or $5,000, in addition to damages for breach of the insurer’s duty. The Louisiana Supreme Court has specifically held that third-party claimants, like Johno, may assert private claims against an insurer for the acts enumerated in Section B, but they have no cause of action against an insurer for violation of Section A’s general duty. Moreover, Section B(5) identifies one of those acts as failing to “pay the amount of any claim due any person insured by the contract” within 60 days after receipt of satisfactory proof of loss from the claimant, when such failure is arbitrary, capricious or without probable cause. Various Louisiana appellate courts have concluded that this provision, although part of Section B, does not give a third-party claimant a cause of action because the claimant does not qualify as a “person insured by the contract” to which Section B(5) refers. Accordingly, the Fourth Circuit concluded that Johno only had a claim for bad faith failure to settle if he was “advancing Duplessis’ claim as assigned to him.”

The Court began its analysis by stating that the settlement agreement signed by Johno and Duplessis, as a contract, was the law between the parties and its clear and unambiguous terms governed. In the agreement, the parties had specifically defined the word “Claim” broadly to include every kind of claim “arising out of tort, contract, statute, regulation or otherwise, including contractual claims, extracontractual claims, claims for indemnity, claims for insurance coverage, and claims for violation of any code, statute, including but not limited to claims under R.S. 22:1973 (formerly 22:1220), statutory or contractual penalties, and bad faith damages.” The Court held that Johno had released all of the “Claims” against Duplessis, but Duplessis had not assigned all “Claims” it had against others including Scottsdale. Instead, the assignment portion of the settlement agreement stated that “DUPLESSIS agrees to assign to RELEASOR [Johno] all contractual rights DUPLESSIS has or may have against HARDROCK, its subcontractors and their insurers, including but not limited to, the indemnity claims asserted by DUPLESSIS in the Demand and any additional rights DUPLESSIS has or may have under the HARDROCK CONTRACT …”, except past indemnity claims Duplessis and its insurer Hanover had to recover defense costs.

The Court of Appeal held that the bad faith failure to settle claims arise from the statute, not the contract of insurance and therefore were not part of the “contractual rights” that Duplessis had assigned to Johno. Further, the use of the word “indemnity” to modify “claims” limited the assignment to claims for indemnity for settlement or costs of defense. Thus, Duplessis had assigned only some of its contractual rights, including the right to seek indemnity from Duplessis’ insurer for the settlement paid to Johno, but Duplessis did not assign any statutory claims for bad faith that it may have had against Scottsdale. Considering that the settlement agreement released all “claims” against Hanover as insurer of Duplessis, which explicitly included statutory claims under 1973, the Court concluded that the parties were “amply able to clearly express” an assignment of such claims against Scottsdale if they had intended to do so. Thus, the Court of Appeal concluded that the unambiguous terms of the settlement agreement did not include any assignment of statutory claims against Scottsdale. As a result, Johno did not have a cause of action against Scottsdale for bad faith failure to settle under R.S. 22:1973.

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